Investment Formulas - What Purpose Do They Serve?
What exactly does a formula do? A complete detailed explanation
can be as vast and complex as each individual investor and is
beyond the scope of this article but a brief summary of a
formula's usefulness would include the two primary functions it
fulfills.
First, over a full market cycle, it will improve your investment
profits without the application of any thought whatsoever on
your part. A good thing for most investors, because the less
emotion they inject into their investment decisions - the better
off they are. Because there are many investors who don't believe
that the market will ever go through a full cycle again - that
the direction of the market is in a permanently upward movement,
except for temporary, minor dips. It might be worthwhile to
point out - without seeming to be pessimistic - that there are
some good arguments against an indefinite continuation of bull
markets... as the past few years have shown.
The second purpose of a formula - apart from the question of
profiting from complete market cycles - is to provide a means of
profiting from more minor fluctuations. It is undeniable that
the market will continue to fluctuate and a formula allows the
investor to benefit from these fluctuations by specifying
conservative investment policies when the market is relatively
high, and more aggressive policies when it is relatively low.
For many, formulas appear rather complicated and so the obvious
question that comes to mind is "Can the small investor
profitably use them?" and the answer is resounding yes. True,
some formulas are so complex that they are unsuitable for most
investors but most formulas do not fall into this category. The
most widely used formulas today, in fact, are based on extremely
simple principles and can be used by anyone with a rough
knowledge of elementary school math. Special measures to adapt
formulas to the needs of small investors are necessary, at times
but it is worth noting that small investors are just as likely
to want to improve their profit performance in the market as are
the larger investors. And what's nice about formula's, is that
there is no particular disadvantage in having a
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small portfolio
when using them.
Security or Uncertainty All investors, both large and small find
themselves in the same basic quandary. All would like to be sure
of what is going to happen next to their capital and so they are
inclined to appreciate the features of fixed-income investments
such as, bonds, savings accounts or commercial paper.
In such investments, their capital is guaranteed and so is their
interest. On the other hand, there are few opportunities for
appreciable profits in these areas and no protection against a
decline in the value of the dollar. As a result, many investors
/ speculators are attracted by the characteristics of common
stocks or currency trading or whatever... where neither their
capital nor their return is guaranteed, but which offer
substantially better opportunities for higher profits through
capital gains.
How to resolve the dilemma? It is obvious that the great
difficulty with all investments is there inherent uncertainty.
One workable suggestion for reducing the damage this uncertainty
can do has been often made. Simply don't buy common stocks or
other higher risk investments at all. However, most investors
tend to regard this idea as, although practical, rather extreme
and are reluctant to abandon the possibilities of profit that
exist in these investment vehicles.
The formula idea is simply a form of protection against
uncertainty. Formulas are designed to allow the investor to
profit from the advantages of owning common stocks or other
higher risk investment alternatives like currency trading, while
providing them with a measure of protection against their
handicaps; to give them some of the stability offered by fixed
income investments, while not condemning them to a low return on
their money. The whole point of formulas is to make the best of
both worlds.
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About the author:
Kevin Erickson is a contributing writer to: Forex Trading | Work At Home | Nursing School
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